Cyprus a tax efficient EU Intellectual Property location
Intellectual property can be one of the most valuable assets or an organisation. Therefore choosing the right location for the centralisation and management of the IP is a very important strategic business decision. The ideal location to establish an IP structure is one that can serve the organisation’s business strategies, safeguard and protect its IP whilst offering a tax beneficial environment.
In 2016 Cyprus implemented the new IP Box Regime, complying with EU regulations and OECD BEPS Action 5 rules, whilst still effectively remaining an ideal location to register an IP company.
Cyprus offers an efficient IP tax regime, coupled with the protection received by the EU Member States and the signatories of all major IP treaties and protocols, guarantees maximum protection and certainty for IP owners.
What are the main provisions of the Cyprus IP regime?
The new provisions provide exemptions from tax of income related to the IP. More specifically:
80% of worldwide qualifying profits generated from the qualifying assets is deeded to be a tax deductible expense
80% of profit generated from the disposal of IP owned by Cypriot resident companies (net of any direct expenses) is exempt from income tax
Effective tax rate of 2,5% or less
What asset is considered as a Qualifying Asset (QA)?
According to the regulations, a Qualifying Asset (QA) is the asset which was acquired, developed or exploited by a person while doing his/her business. It is the result of the business’s Research and Development efforts, except the intellectual property related to marketing.
Under the new Cyprus IP regime, Qualifying Assets include the following:
Patents (as defined in the amended Patent Law)
Software, computer programs
Other intangible assets protected by law which fall under one of the below criteria:
Utility models, intellectual property assets which provide protection to plants and genetic material, orphan drug designations and patent extensions.
Non-obvious, useful and novel intangible assets that the person who using these does not earn an annual revenue of more than €7.5 million (€50 million if it is a group of these person)
Qualifying Assets do not include trade names, brands, trademarks, image rights and other intellectual property used for the marketing of goods and services.
How to calculate Qualifying Profits (QP)?
The new Cyprus IP regime adopts the nexus fraction to determine the amount of qualifying profits allowed to be considered as a tax deductible expense.
Qualifying Profits (QP) is the ratio of the Overall Income (OI) corresponding to the fraction of the Qualifying Expenditure (QE) plus the Uplift Expenditure (UE) over the Overall Expenditure (OE) incurred for the QA. The formula is as below:
As abovementioned, the taxpayer may choose to waive 80% of this amount for each tax year in part or in whole.
What are Qualifying Expenses?
Qualifying Expenditure is the sum of all Research & Development (R&D) expenditure that incurred for the development, enhancement and the creation of a QA. This expenditure should be directly related to the QA.
Salary and wages
General expenses related with R&D
Commission expenditure related with R&D
R&D expenditure outsourced to irrelevant parties
However, a Qualifying Expenditure does not include:
The acquisition cost of an intangible asset
Interest paid or payable
Expenditure for acquisition or construction of immovable property
Amounts paid or payable directly or indirectly to a related person to conduct R&D, irrespective if these costs relate to a cost sharing agreement
Costs which cannot be proved to be directly related with a specific QA
Under the Cyprus IP Regime, any expenditure of R&D that has been assigned to unrelated parties, as well as any expenses if general and theoretical nature for the R&D that cannot be allocated to the Qualifying Expenditure of a specific QA, can be allocated proportionately to the QA.
Who is qualified to enjoy the tax treatment under the Cyprus IP Regime?
Qualifying Persons who are eligible to waive 80% of their QP under the Cyprus IP Regime include:
Cyprus tax resident taxpayers
Tax resident Permanent Establishments (Pes) of non-tax resident persons
Foreign PEs which are subject to Cyprus taxation
The amended provisions also ensured that the taxpayer can elect whether a foreign PE is taxable in Cyprus in order to be classified as a Qualifying Person under the new IP regime.
Any other changes need to know?
The Income Tax Law (ITL) also introduced amendments regarding capital allowance for all intangible assets (excluding goodwill and assets qualifying for the existing IP regime).
Under the new Cyprus IP Regime and the ITL provisions, the capital costs of the assets will be considers as a capital allowance for tax deduction and can be spread over the useful life (maximum 20 years) of the asset.
The taxpayer can also choose not to claim the capital allowance for the QA in a particular tax year. Upon the disposal of the QA, the taxpayer is required to prepare a balance statement including any balancing addition subject to Income Tax and any tax deduction.
Last but not the least
Under the new Cyprus IP Regime, it is required that the company/structure has sufficient substance in Cyprus.
More precisely, it means the company has to prove its management and control is conducted in and from Cyprus with experienced and qualified directors, as well as office space.